sentimenTrader Blog


2018-12-07 | Jason Goepfert

This is an abridged version of our Daily Report.

Regime change

Stocks have swung more than 1.5 standard deviations on more than half the days during the past two months. That’s a big change from September when it happened only once. 

When stocks change from a low-volatility regime to a high one, it has preceded mostly higher prices longer-term. There wasn’t a lot of evidence that the change to a higher level of extreme daily price changes preceded significant changes in the market environment.

More new lows

Even while the S&P 500 is holding above its lows from the past year, many securities have sunk to a lower low, enough so that 52-week lows on the NYSE are the highest in two years.

They accounted for more than 21% of all issues on Thursday. This has been a short-term negative in the past.

Unreliable reversal

The S&P 500 fund, SPY, gapped down more than 1%, lost more than 2% during the day and eclipsed its lowest close over the past six months, but reversed to close almost positive on the day. This looks nice on a chart, but the other 8 times it’s happened, SPY built on its gains only 2 times over the next two weeks. Single-day reversal patterns are notoriously fickle.

Except for small-caps

The IWM fund had a more dramatic reversal, falling below its lowest close of the past year before reversing. Of the 6 other times it’s done so, it continued to rally over the next week all 6 times averaging 3.3%.


2018-12-06 | Jason Goepfert

More concerns about the efficacy of trade talks are the consensus excuse for why futures are showing a large loss this morning. Whatever the actual reason(s), we're seeing a rare one-two punch.The last times the S&P 500 cash index lost at least 3% then the futures market gapped down more than 1% ...

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2018-12-05 | Jason Goepfert

This is an abridged version of our Daily Report.

Upside down

The yields on 2- and 3-year Treasuries are now higher than 5-year maturities, an inversion of the short end of the yield curve.

This tends to precede an inversion of the more common 2-year vs 10-year yields. But there has been a long lead time between an inversion on the short end of the curve and a recession, and an even longer lead time before a market peak.

Forward returns in the S&P 500 (and most sectors) were good after the short end inverted. The S&P’s return when the short end inverted for the first time in a year averaged 6.6% over the next two months and was positive 5 out of 6 times.

Vicious selling

The selling pressure on Tuesday was matched only by February 5 of this year. Volume flowing into advancing stocks was below 7% and the Arms Index shows just how skewed that was relative to the percentage of stocks that rose.

Other days with just lopsided pressure saw generally rising prices, especially when excluding 2007. Returns over the next 2-12 weeks were significantly above random, and the risk/reward was skewed positive. Most of the risk over the next year was focused in the first month.

November flow

Traders yanked a significant amount of money from technology-focused ETFs in November, as well as broad-based commodity funds. They were much more positive on health care and emerging market stocks, as well as bond funds.

Jumpy

The VIX jumped 4 points on Tuesday but still closed below 21. That has happened on 14 other days since 1990.


2018-12-04 | Jason Goepfert

This is an abridged version of our Daily Report.

Partnership pessimism

One of the better ways to gain exposure to master limited partnerships (MLPs) is through closed-end funds (CEFs), which often swing to premiums or discounts to the value of their underlying holdings based almost purely on change in investor sentiment.

The average discount on over a dozen MLP closed-end funds is now large and suggests that investors are showing excessive pessimism toward the sector. It’s not perfect, but it does tend to lead to rebounds.

Wall Street looks to 2019

Strategists surveyed by Bloomberg are estimating a gain of about 9% in the S&P for 2019.

That’s right in line with their usual forecast. Over the past 20 years, their yearly forecast has been wildly off the mark more often than not, so their aggregate estimate for next year should be taken with a grain of salt.

Sentiment and seasonality

The Commodity Sentiment & Seasonality Screen shows that lumber, coffee, and heating oil all having an Optimism Index below 30 while averaging a gain of at least 1% in December. The dollar and natural gas show high optimism and negative average return. The screen for ETFs shows a smattering of country funds with low optimism and good December returns.

New trend?

The S&P just closed above its 50-day average for the first time in more than 30 days and is also above its 200-day average. There have been 7 times this happened in the past 40 years, all leading to gains over the next 3 months, averaging 8.0%. Prior to the last 40 years, it had a mostly negative bias.


2018-12-03 | Jason Goepfert

This is an abridged version of our Daily Report.

A positive divergence

When the S&P fell to a 6-month low last week, significantly fewer of its individual stocks did so, creating a positive divergence in its Advance/Decline Line.

That looks pretty on a chart, but it hasn’t been consistent enough, and underperformed days when there was no divergence at all.

A better sign is that the S&P surged to its best gain in 7 years following last week’s 6-month low. Longer-term, they tended to be a good sign, with rallies over the next 6 months after 9 of the 11 signals. The only real bull traps, sucking in buyers only to reverse into a protracted decline, were in 1956 and 1974.

Growth worries

A popular aggregate economic model from ECRI is showing a sudden downturn in its growth rate, ending one of the longest streaks in growth mode (or at least not large contractions).

It is very near the average level at the start of other recessions in the past 50 years. By the time it fell to this level, the S&P 500’s future returns were weak, but not quite consistent enough to call it a sell signal.

Cash flow

Mutual fund managers increased their cash level to 3.2% of assets in October, and assets in equity funds fell to 4.7 times the amount in money markets. Both are off their all-time extremes but have a long way to go before even hinting at pessimism.

The latest Commitments of Traders report was released, covering positions through Tuesday

The 3-Year Min/Max Screen shows that “smart money” hedgers moved to only one new multi-year extreme, a long position in Ultra 30-year Treasuries.


2018-12-03 | Jason Goepfert

Most of the time, participants have no idea why markets move. Reasons are given during and after the fact, but they're just guesses that sound good, really.A handful of times each year, though, the reasons are clear. Based on the way markets have been trading in recent weeks and the reaction ...

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2018-11-30 | Jason Goepfert

This is an abridged version of our Daily Report.

A bottom in jobless claims

After hitting a multi-year low, jobless claims have hit a 6-month high and are above a 52-week average.

That tends to lead to a rise in the unemployment rate, an input to many recession models. But a nascent uptrend in jobless claims has not consistently led to weakness in stocks for at least the next year. Over the next 6-12 months, there was precious little evidence that rising claims exerted a negative influence on stocks.

Margin debt decline

Margin debt plunged in October and is now down year-over-year. After a prolonged rise, the first y/y decline has had a modest record at preceding future weakness in stocks.

Investors’ net worth is also reversing after hitting a record low, but that, too, has a mixed record for stocks. The S&P was weak more than half the time over the next three months, but reward was still higher than risk. It marked the peak of several bull markets but most often, gave false warnings.

Kind of a thrust

Stocks haven’t quite seen a breadth thrust off the low but it got close. After hitting a 6-month low on Friday, Up Volume was more than 70% on Monday and just under 90% on Wednesday. Since 1950, there have been 26 similar signals, leading to modestly positive returns.

See ya

Investors are leaving some of the largest bond ETFs. Shares outstanding in LQD have dropped to the lowest since 2016, and shares in JNK are the lowest since 2011.


2018-11-29 | Jason Goepfert

This is an abridged version of our Daily Report.

Sentiment vs earnings

The S&P 500’s flat return in 2018 so far has been due to the growth in earnings being offset by a drop in sentiment. The price/earnings ratio for the index has declined about as much as earnings have grown, like 2011.

Other years since 1969 that have seen this dynamic typically showed good returns over the next year. Most impressive was the risk/reward – the S&P rallied more than 21% on average at its best point over the next year, while declining an average of only 4% at its worst point.

Everybody out, then back in

Massive sell programs hit the market multiple times near the end of October. But 2 of the last 3 days have seen just as massive buy programs come in at some point during the day. Wednesday’s TICK reading is in the top 10 of all days since 1990, which is usually a good sign longer-term, especially when coming on the heels of big sell programs.

In the medium- to long-term, it was a good sign of eager buying interest that wasn’t easily sidetracked. What’s most encouraging about this is that the huge buying interest is coming on the heels of the heavy sell programs.

Reversal

After hitting a 6-month low on Friday, the S&P 500 has jumped at least 1.5% twice in the past three sessions. That has happened 44 times since 1928, only 16 of which occurred when the economy was not in recession.

Unnatural

The Optimism Index on natural gas has soared above 80 and is the highest in more than 20 years.


2018-11-28 | Jason Goepfert

This is an abridged version of our Daily Report.

Heavy selling south of the border

Mexican stocks have dropped 30% from their highs in US dollars and 20% in pesos.

This has nothing to do with the politics of the new administration, which admittedly is a big omit. In emerging markets, new ruling parties can have an outsized impact on markets. But declines this severe have usually preceded at least short-term bounces, including in emerging markets generally.

Monday’s drop of more than 4% to a new multi-year lows also shows signs of being exhaustive, with excellent long-term returns in Mexican stocks and emerging markets generally.

Put interest

Over the past 8 weeks, the smallest of options traders have focused so much on buying puts as a percentage of their total option volume that the only times that can match it were near the ends of the bear markets in 2002 and 2008.

This comes even as other traders let their put contracts expire, pushing open interest below what was seen near the low in October 2008. While many like to assume that this is a contrary indicator, it is not. A high level of put open interest tends to be a negative for stocks; a low level tends to be a positive.

Tailwind

There have been 13 other times since 1928 when the S&P 500 limped into the end of November within 3% of its 6-month low.  

Mexico, again

If you go to the Optimism Index Heatmap and click the 50-day moving average, the most-hated ETF we follow is EWW. According to the Backtest Engine, when the 50-day average Optimism Index for EWW has dropped below 35, where it is now, EWW was higher a year later 91% of the time.


2018-11-27 | Jason Goepfert

This is an abridged version of our Daily Report.

Rush to safety

Investors have moved into “safe” low-volatility stocks at the expense of “risky” high-beta ones. The ratio between the two just hit a two-year high, which has preceded some trouble for stocks over the shorter-term.

Over the longer-term, which is where this should be most effective, its record was mixed. The S&P did show relatively poor returns, but there were some large gains too. Perhaps most importantly, the risk/reward was skewed heavily to the downside.

Worst-case corrections

If we assume the worst case, that Friday’s move into a correction for the S&P 500 morphs into a peak of economic activity and a recession, then most of the damage could already have been done.

It takes the NBER about six months to announce it, by which time the S&P has lost a further 5% on average. But its returns over the next few months were much less severe than most investors would expect. From the date the S&P fell into one of these worst-case corrections until three months later, it showed a gain only once. But its average return was only -2.8%.

Bad BID

The stock of art dealer Sotheby’s (BID) has dropped by more than a third from its peak in June. This is often taken as a warning sign for the broader market. We looked at this in the November 11, 2015 report, where declines of 33% in BID correctly preceded 3 major declines in stocks, and had 2 false signals.

The latest Commiments of Traders report was released, covering positions through Tuesday

The 3-Year Min/Max Screen didn’t show any new extremes of note (just orange juice and 2-year Treasuries), as hedgers mostly modestly eased back on their existing positions.


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